The February swoon in the stock market was nerve-racking for all investors, but it also created a huge opportunity. Great stocks were suddenly “on sale,” and those who stuck to their plans found themselves staring at a great profit potential.
In fact, one trade on Apple stock that we told Money Morning Members about last week just returned 250%.
Best of all, the trade actually reduced risk when the markets were extremely volatile…
Trading experts agree that when the markets become turbulent, one of the best strategies is to reduce risk. That could mean trading smaller amounts or even changing to more conservative strategies. And that is exactly what Money Morning‘s options trading specialist, Tom Gentile, offered to readers last week.
It was a conservative way to play a great stock in a turbulent market. Even better, it only took a small amount of money to get started.
Tom focused on Apple Inc. (Nasdaq: AAPL), saying it is fundamentally a great stock as it pushes into subscriptions and recurring revenue. He also noted its trading pattern, which still was quite positive.
He loved Apple, but buying a 100-share lot would mean committing over $15,000 at the time.
He did not want to just buy a call option, either. There was still too much risk in the market, and volatilities – and options prices – were still very high. A trade using call options could have cost around $7,500.
So how did Tom play it to make 250% in just a few days with lower risk?
Tom’s Low-Risk Profit Maker on Apple Stock
Options traders call it a “spread,” or “loophole,” trade. It involves buying a call option and selling a call option with a higher strike price. Basically, the sale of the higher strike call option helps finance the purchase of the lower strike call options, and you make money as the underlying stock rises.
This is better than just buying a call by itself, because your cost is reduced significantly. The less money you pay, the lower your risk. And the higher the profit potential.
On Feb. 5, Tom outlined his trade, and it did not take much money to get started. In
fact, it was down around $110. Compare that to just buying the calls for $265, or the stock itself, at over $15,000. You control the same amount of stock for so much less – and with less risk.
Here’s how it worked.
With Apple trading at around $157 per share, Tom told his readers to:
Buy the March 9, $165 call, which traded at about $2.65
Sell the March 9, $170 call, which traded at about $1.55
The net cost for one spread was $2.65 – $1.55 = $1.10, or $110 for one spread contract.
The most you can lose on this trade is the net cost of the spread, or $110. This was true if Apple fell to $100 per share or even to zero.
For readers who bought more than one spread contract, Tom recommends closing half of the trade now that it has doubled in value and letting the rest ride until expiration. The value of the spread Thursday was near $400 per contract.
The maximum profit for this trade is the difference between the two strike prices minus the amount of money you paid to set it up.
Profit = $5.00 (the difference between the strikes) minus the $1.10 cost = $3.90, or $390 per spread.
At expiration, the return will be 254%. Any portion already closed out was still in the triple digits.
*This has been a guest post by Money Morning*